21st Century Logistics: Harnessing the Demand Chain
Steve Miller, C.P.M., CTM
Steve Miller, C.P.M., CTM, Director, Supply Management, California Amplifier, Camarillo, CA 93012, 805-987-9000, firstname.lastname@example.org
86th Annual International Conference Proceedings - 2001
Abstract. Just when Supply Chain Management has become an everyday word, it's time for technology to push us toward the next frontier: Demand Chain Management (DCM). Sellers want to capture the highest end of the supply chain where the demand is created; the end-user. DCM is 21st century logistics process that will move buyers and sellers closer together.
The supply environment in the ol' days. It has not been that many years ago that the word logistics conjured-up the image of diesel tractor/trailers, ships leaving port and little brown trucks delivering packages. It was next to impossible to effectively trace a package, contact your package delivery service account representative or get any semblance of customer service from a logistics provider that was even close to what you received from other suppliers. As a matter of fact, freight carriers and your other suppliers seemed to pursue their respective businesses so differently that it did not seem proper to term a freight carrier as a supplier.
Like everything else in this life, change is inevitable and so to with logistics. Witness the fundamental changes taking place within UPS. UPS went "public" in November 1999. This is pretty amazing in itself, considering UPS is five times larger than their nearest competitor, The FDX Corporation (parent company to Federal Express). UPS representatives cited three major concern that caused them to seek a public infusion of capital:
- Continuing needs to increase the labor force (largely unionized) that cannot be supplied by moving high labor content jobs offshore, like other major companies. When UPS adds headcount, it is expensive union labor.
- UPS' operations in Europe are their weakest link. Significant funds were needed to bolster UPS' presence in Europe or risk becoming a second-team player in that arena. Many industry analysts afford them "first-team" status in Europe only because of the name-brand recognition.
- The biggest problem was the huge upswing in business due to deliveries stemming from electronic commerce-related orders. UPS stated that the increase in e-commerce deliveries was taxing an already heavily burdened system. UPS needed new facilities, new trucks, and more material handling equipment.
If UPS felt the need to do things differently, then you can be sure that everyone else does, too. When it comes to e-commerce, it creates a unique paradox: As much as e-commerce is causing discomfort for supply channels, it will also help resolve the problems, too.
The supply environment in the new millennium.
What do the following companies have in common?
- Dana Corporation
- Time Warner Trade Publishing
- Waterpik Technologies
- A B Electrolux
- Dell Computer
Simply put, each of them has recognized the need to take major strides in the way they handle logistics.
Dana hired Catalyst International (a software provider/consultant) to install a warehouse management system (WMS) to increase distribution efficiency in their five North American regional distribution centers (RDCs). Dana spent $3 million.
Time Warner hired QSSI to install a WMS in their new 500,000 square foot RDC in Labanon, IN.
Waterpik Technologies recognized four years ago that the diversity of customers they served was so complex that they outsourced their entire shipping, receiving, order picking and finished goods inventory management to a third party logistics provider (3PL), Caliber Logistics.
A B Electrolux, the largest European appliance manufacturer, based in Sweden, introduced a new refrigerator in 2000. In an attempt to get as close to the end of the supply chain as possible where the only, true, independent demand decision is made, Electrolux offered a unit with a personal computer, barcode reader and Internet capability built-in. As consumers use a product, it can be re-ordered by simply passing the UPC barcode through the reader, thereby creating an electronic grocery list. The list can then be printed to take to the store or sent electronically to the store of your choice. When it comes to influencing a consumer's re-purchase decision, you cannot get much closer than when the product is in their hands and with a mere "bleep," your mission is accomplished.
Amazon.com and Wal-Mart had a little tiff. Amazon.com knew that electronic commerce would allow a consumer to buy nearly anything from them by the stroke of a button, but physical distribution of the product was still by pony express. Amazon.com felt the only answer was to have world-class logistics information technology (LIT). They looked to the king of the consumer distribution industry, Wal-Mart, and decided that whatever Wal-Mart is doing, they should be, too. To get world-class LIT, Amazon.com beheaded Wal-Mart's Information Technology department, starting with the Chief Information Officer and his direct-report staff. Wal-Mart was not too happy and sued Amazon.com. An out-of-court settlement was reached. Amazon.com had their hand slapped, paid a settlement fee to Wal-Mart and agreed not to pirate anyone else from Wal-Mart. Amazon.com was allowed to keep the people they spirited away. This illustrates the point that e-commerce is testing the supply chain and that traditional logistics does not work.
Dell Computer in 1998 took a bold step in a stodgy industry when it comes to product distribution: They decided to start doing direct-consumer sales. To say that it has been wildly successful, is an understatement. In an industry that typically turned their finished goods six times a year, Dell hit 28 turns in 1998 and nearly 50 turns in 1999.
All of the foregoing examples are being fueled by expanding product lines and customer bases, largely due to the advent of electronic data interchange, electronic commerce via the Internet and recent software advances. Much of what is seen today that is done via the Internet and other software solutions, could not have been done as recently as 1997. AMR Research says that business conducted on the Internet accounted for $43 billion in sales in 1998. They say by 2003, the Internet will be a $1.3 trillion business. E-Commerce has a huge impact on logistics now, and it will become more pronounced as time goes by.
What is it all about?
There are three forces driving change in business and industry:
- Industry consolidation
- Boundless technology
Globalization is easily seen around us everyday. Industry consolidation is visible, too. A good example is the automotive industry; Daimler-Benz bought Chrysler, and Renault purchased controlling interest in Nissan. Industry analysts say in the next five years that the 20 major automakers will consolidate down to 10 and by 2015 it will be down to three companies. It is easy to conceptualize consolidation in a big industry like car manufacturing, but it is also happening in every phase of manufacturing. In 1990, the average industrial buyer handled 127 suppliers. By 1997, the average dropped to 60 suppliers.
Many of the changes in globalization and industry consolidation are being made possible by rapid advances in technology. Technologists will continue to develop new equipment and software; much of which, will be focused on the most dysfunctional parts of our personal and professional lives. When we view the kind of business Amazon.com has created, it is easy to see that the Internet has given us a great gift. Unfortunately, the physical distribution of product through logistics channels is the weak link in the supply chain. The traditional supply chain qualifies as dysfunctional.
If molecular transportation were possible, like in Star Trek, then discussing logistics as a supply chain constraint would be moot. Until that happens, however, supply chain experts are going to examine every facet of material flow from Mother Earth into the consumer's home, trying to find ways to streamline the process.
Demand-pull and supply chain optimization. In order to simplify the supply chain and reduce the time from Mother Earth to the consumer, it is necessary to eliminate waste in materials and time. The supply chain is so inefficient that the U.S. consumer goods industry, for example, holds about $250 billion worth of excess inventory to address customer service and product availability problems. The only answer to this problem is to integrate each supply chain link via electronic means and "pull" product through distribution, in lieu of pushing it through. As has been seen with Amazon.com and Electorlux' refrigerator, suppliers are electronically able to capture product demand information. As critical as it is to get control of the independent-demand decision, the problem is even tougher to relay that information back through the demand chain. Electronic commerce is a major factor in shrinking the logistics of business-to-business transactions.
Hierarchy of supply chain success.
There are three factors that govern supply chain success:
- Operating on a demand-pull basis
- Integrating operational planning in the supply chain
- Mutual kaizen events up & down the supply chain
For purposes of discussion regarding e-commerce and logistics, only demand-pull and integrated operational planning are applicable.
E-Commerce today is an excellent tactical tool. When it comes to scheduling product delivery on a demand-pull basis, e-commerce is ideally suited. It should be noted here that we often focus our attention on e-commerce as strictly an Internet tool. On the contrary, electronic commerce can manifest itself in any way that business can be transacted electronically. Here are a few examples:
- Company "A" has a Kanban system set-up with their number one supplier. As product is consumed in Company A's plant, a barcode label, affixed to each box from the supplier, is pulled and scanned into a modem system that electronically transmits the next release to the supplier.
- Company "B" has a Kanban system set-up with their top three suppliers. Company "B" provided Internet e-mail access to workers on their shop floor and they send their Kanban releases via e-mail to the supplier's customer service representatives. Each supplier acknowledges the release via return e-mail.
- Company "C" has a three-day scheduling system set-up with their top five suppliers. The current day and next day's schedule are fixed, but the third day is open for scheduling up to a cutoff time. Company "C" has a dedicated personal computer (PC) for the suppliers to log into. The PC has a software program loaded that allows the suppliers to call-in, and with password protection, view their portion of Company C's material demand for the third day.
- Company "D" has a Kanban system set-up with their biggest supplier. Company D's shop personnel were given Internet access. When material demand occurs in the shop, production workers log into the supplier's website and post the next Kanban release.
Electronic product release systems can dramatically change the timing from identifying a need to getting the product to the user. The key to understanding this process is the fact that logistics is not just the transportation component of the process, but the complete replenishment cycle. To be sure, getting multiple organizations to communicate on an intimate level is a major undertaking. Doing this is the essence of supply chain management. If demand-pull product flow can be accomplished successfully using e-commerce solutions, then any organization can feel comfortable in knowing they have tackled a major tactical problem. But, as organizations look to the future of e-commerce, many wonder how they can use the electronic advantage for strategic initiatives, not just transactional, tactical processes.
Going to the next step of success in logistics requires organizations to think and act strategically. If demand-pull satisfies a major tactical problem, then integrated operational planning is the strategic opportunity in the logistics hierarchy. Integrated operational planning is the function where three or more links in a supply chain work together to determine the end-users needs and then what actions need to be taken up & down the chain to optimize operations. Much of integrated operations planning involves throwing away the worn-out sales forecast and communicating customer demands/expectations without any hedging, buffer stocks or other fudge factors.
The next step: Demand Chain Management. There is no doubt that to achieve the level of cooperation necessary in an integrated operations environment, it will take a major paradigm shift in social behavior and business philosophy. There are many sources available for instruction on the social and business reengineering necessary to achieve success in supply chain management; therefore, this is not the focus here. Achieving an unprecedented level of cooperation in integrated operations planning is the next frontier. Although supply chain management expertise is a coup to cherish, and is seen as the "ultimate" in managing the extended enterprise, it still is a stepping-stone in the arena of world-class logistics management.
Demand chain management is the next frontier, and it cannot be achieved without e-commerce. Sometimes phrases and words are overlooked as to their true meaning. Take the case of the words "supply" and "demand." Can supply happen before demand? No. A demand must exist before the supply can be given. This then is the heart of demand chain management, as opposed to supply chain management. Supply chain management is reacting to the demand previously created in the value chain. Demand chain management seeks to tap into the demand-decision process and cause the supply chain to function only when demand is present. Succinctly put, demand chain management is a collaborative process that involves accurately determining how much product needs to be produced (the demand) at each level of the supply chain through the end customer.
Demand chain management did not come into existence overnight. It has been a slow process. Even today, (as you will see) it would not be possible without e-commerce. When speed-to-market was measured in years, months and weeks, the primary differentiator between organizations was product quality. As product quality started to improve, the business focus shifted to having the items you needed when you needed them, and not any sooner. Material delivery initiatives came around, like JIT, Kanban and consignment inventories. These concepts led to supply chain management. Realizing that supply chain management was not eliminating $250 billion of inventory glut, led the experts to believe something else was needed. Until recent software advances, demand chain management would not have been possible. For many high-volume materials organizations, these advances are coming none too soon. Consider the fact that speed-to-market nowadays is measured in weeks, days and hours! Without computer/software enhancements and the Internet, the $250 billion inventory glut would have gotten bigger.
To fix the material planning and demand forecasting problems, participants in the value chain have to cease planning their activities based on their own estimates for demand. But, without quick and accurate visibility to the information, things will not change. Ralph Drayer, vice president of worldwide efficient consumer response for Procter & Gamble says, "The key to optimizing your supply chain's performance is to create close collaboration among all trading partners. The essence of ECR, in fact, is collaboration. You can realize some short-term efficiencies by yourself, but the real payout comes when you are working together with your key trading partners. With that comes the need for greater trust and sharing of information."
The bridge between SCM and DCM. The bridge between SCM and DCM is Collaborative Planning, Forecasting and Replenishment (CPFR). CPFR is a collection of new business practices that leverages the Internet and electronic data interchange to streamline product demand planning, thereby speeding-up the logistics channels. As has been said before, only in the last few years has the hardware and software technology been available to make CPFR a reality. CPFR yields lower inventory costs, lower operating costs, faster cycle times, higher sales and greater customer satisfaction.
CPFR begins with a basic agreement between trading partners to develop a market-specific plan. Some organizations are establishing virtual supply chains with three entities coming together and using CPFR as the cornerstone of the process. A key to success is all parties agree to own the process and the plan. CPFR differs from previous initiatives by requiring a greater level of integration within and between trading partners. CPFR began in 1996 and is the result of more than 30 companies, the likes of P & G, Nabisco, Warner Lambert, Hewlett Packard, Levi-Strauss and Co, Wal-Mart and K-Mart. CPFR has a major impact on many inventory drivers, the biggest of which, is on uncertain demand. CPFR allows demand chain partners to work more closely to reduce queues and lagtime between demand recognition and actual product delivery.
A major milestone in CPFR development has been the publishing of standards by the Voluntary Inter-industry Commerce Standards (VICS) Association. The guidelines were designed to be non-technology specific, which can be tricky when new concepts rollout and only a few providers are available. Currently, a number of software products are available, such as Transview's e-Logistix, which will give fully visible and executable activities on a real time basis up & down the demand chain. CPFR is designed to allow each demand chain partner to input their data regarding product demands, lead-times and other pertinent data. The software product allows each partner to see what each other's needs are and be able to integrate those needs into their own operational planning. This differs greatly from the old-fashioned way of each organization trying to estimate or guess what to load into their production forecast based on historical data or a sales/marketing representative's guess.
Since the CPFR process is owned jointly by each demand chain partner, then the software to function the system must be located where everyone can get access. Typically, the software to function the system is loaded into each partner's computer system with one entity functioning as the primary server to store all the data. Each partner accesses the CPFR system via a website or computer dial-up. From a software/hardware standpoint, the system is not any more complex than other products developed in recent years. The drawback (if you can call it that) is that the demand chain partners cannot use their own computer system to talk to the other partner's computer system. To resolve the problem, some suppliers are offering a CPFR software product that is designed to function as a bridging device between dissimilar computer systems. Regardless the software product you use, or how it is accessed (Internet, modem, etc.); the biggest hurdle is establishing the discipline to use the system properly.
Procter & Gamble has been a leader in CPFR, thus far. They have five CPFR pilot projects running, two of which, are Wal-Mart and Target department stores. The demand chain partners all view the focus in the project from the same perspective: How do we improve customer service and product availability for the end customer - the consumer? Wal-Mart has also partnered with Lucent Technology and Sara Lee. In these pilots, the focus is on tracking the impact on the demand chain caused by key market events like store openings and major advertising campaigns.
In the final analysis, CPFR is not the last chapter in the book. The ability to accomplish CPFR would not exist without the tools of electronic commerce. CPFR is an excellent tool for partners to integrate their operational planning and eliminate excess material and time in the demand chain. The collaboration concept through electronic commerce will soon tackle how to mutually plan transportation management. Each step is designed to create demand chains that will break the sound barrier in speed-to-market. The most important measure in a speedy demand chain is not having huge stockpiles of product, but having the exact product the customer wants, exactly when he wants it. In years past, the huge stockpile satisfied the customer's need to have it now, but his choices were limited. Now customers not only want product immediately, but they also want the flexibility to choose which brand(s) they want immediately. E-commerce and CPFR helps exceed the customers' expectations.